3. Opening: Overture II (Adagio)
Salt is essential for life — you cannot live without it.
Salt has been important to humanity for life on this planet.
The word "salary" comes from “sal”, or salt,
which was part of the pay of Roman soldiers.
African and European explorers traded an ounce of salt for an ounce of gold —
salt was literally worth its weight in gold.
Salt is important to many biological processes, but too much salt can hurt you,
but the same can be said of most things — even oxygen and water.
H0: Gold in our asset mix is like salt in our food
Q:Do you eat saltless?
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4. Agenda
Economic Perspective Financial Institutions
Increasing Risk
Risk Perception & Manipulation
Linear Thinking
In Between Conclusion
Gold as Asset Class
Change to Gold
New Solutions
Conclusion
It takes a 40 meters runway to make a 9 meter long jump….
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5. Economic Perspective Financial Institutions
Financial Sustainability at stake
The financial sustainability of financial institutions is at stake
To ensure their obligations, financial institutions have to
optimize ‘Risk – Return’ and diversify their portfolio
Worldwide, pension fund funding ratios (assets/liabilities)
fall short
Insurers, banks and pension funds all have to face more
volatile markets, lower interest rates and more systemic
risk
All financial Institutions have to meet higher regulation
standards to withstand the future economic climate and
developments
More diversification power and less counterparty risk are
key issues in reducing future risk
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6. Economic Perspective Financial Institutions
Economic and Pensions Status Quo
• Economic SQ
- 2007: subprime crisis
- 2007-2008: from housing crisis to banking crisis
- 2009-2011: from bank crisis to country crisis
- 2011-2012: from country crisis to world Crisis
- Declining confidence, negative economic outlook
- Future Euro and Dollar is under discussion
• Pensions SQ
- Increasing attention to governance and compliance
- Considerable uncertainty main asset classes (fixed income, equities)
- Low interest rates, rising inflation, risk of hyperinflation
- Increasing reserve and coverage gaps: no serious signs of recovery
- Risk-free discount rate fluctuates and is under discussion
- Limited ability to recover from premium, discounts threaten
- No clear regulatory framework surrounding Pension Agreement
- No clear vision or approach on 'ancient pension rights‘
- Historical ‘proven’ linear based models fall short in modeling the new economy
- To what extent are models based upon ‘historical data’ also ‘future proof’?
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7. Economic Perspective Financial Institutions
Market Outlook & Key Questions
Market Outlook 2012 and Further
• Prolonged period of continuing uncertainty with low economic growth
• Increasing volatility and covariance of all major asset classes (equities, bonds)
• Besides ‘Performance Risk’, other risks demand attention: Economic Risk,
Principal Risk, Credit Risk, Collateral Risk, Collateral Margin Call Risk, Country
Default Risk, Currency Risk, Euro-Risk, Longevity Risk, Cost Risk, etc.
• Continuously changing regulatory requirements with still uncertain effects:
EMIR, Mifid2, Cost Transparency, FTK1/2, AIFMD, etc.
• Risk-free interest rate curve based on the adjusted EUR swap curve varies
strongly over time.
• Free lunches: There appear to be no more "safe havens”. Return = Risk
Key Questions
1. Is the actual asset mix is still 'in line' with the defined risk appetite?
2. Does the actual asset mix still guarantee the required diversity?
3. Can investing in gold contribute to a sustainable ‘risk return profile’ and an
improved diversity?
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8. Increasing Risk
Global Pension Asset/Liability Development
Asset/Liability Indicator (Global Basis)
L
A
A/L
Source: Towers Watson
Conclusions
• Global pension fund balance sheets worsened during 1998-2011,
losing 25.4% in the A/L indicator
• A/L Indictor lost 4.3% in 2011
• The growth in liabilities exceeds by far the growth in assets
Source: Rubbaniy
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9. Increasing Risk
Return and Risk Outlook
Return Climate Outlook
• Low Interest Rates
• High Risk Stocks
• Increasing Volatility
Advice Commission Parameters
• Fixed Income : 4.5%
• Listed Stocks: 7.0%
• Other Stocks
& real Estate: 7.5%
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10. Increasing Risk
DNB Dutch Pension Funds Investigation
1. Conclusion DNB
Actual performance 2000-2010 is 0.2% better than ‘own defined’ benchmark
2. Other Conclusions
• Compound average performance (4.2%) equals arithmetic average performance
• Average performance (4.2%) < 10Y Eurobonds performance
There’s no pay out on risk!!! Source: DNB
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11. Increasing Risk
EU Government Bonds
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12. Increasing Risk
EU Country Default Risk
Rfr= risk free rate
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13. Increasing Risk
European Stability Mechanism (ESM) Treaty
• ESM may demand an unlimited amount of money from European countries
• ESM is not accountable for what happens to the money
• ESM has the power to reduce private customer savings
• There are no compliance or control measures defined
• ESM has no targets, cost-limitation and enjoys complete immunity.
Line 2012 IF (SPAIN==FALSE) THEN {EUROPE=DEFAULT} ; END
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14. Increasing Risk
Longevity Risk Outlook
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15. Increasing Risk
Pension Fund Confidence Level Risk
Discussion
1. A real pension
objective puts the
nominal pension
at risk
2. How sure is your
pension?
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16. Increasing Risk
Realistic Pension Perspectives?
Basel III
Solvency II
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17. Risk Perception & Manipulation
New Insights
Definition of Risk-levels by United States Secretary of Defense Donald Rumsfeld
during the Iraq war (2002):
What we know
• Known Knowns
There are known knowns;
there are things we know that we know
• Known Unknowns
There are known unknowns; that is to say,
there are things that we now know we don’t know
• Unknown Unknowns
But there are also unknown unknowns;
there are things we do not know we don’t know."
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18. Risk Perception & Manipulation
Intermezzo: The Actuary as Risk Manager I
Actuary Anno 1100 A.D. Actuary Anno 2012 A.D.
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19. Risk Perception & Manipulation
Intermezzo: The Actuary as Risk Manager II
Where are we today?
Actuary Anno 2012
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20. Risk Perception & Manipulation
We overestimate our Mathematical abilities…
30 37 42
1 7 13
2 8 15
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21. Risk Perception & Manipulation
Artificial Discussable Market & Liability Value
‘Market Value Manipulation’
Artificial FED & ECB rates: 0-1%
Consequences:
1. ‘Minimalized’ T. Bond rates
2. ‘Pushed’ Stock Markets
3. ‘Push backed’ Inflation
Discussion
1. Market Value is artificial and a pension fund killer
2. 5-10Y Average Market Value Control is more adequate
3. Liability Risk Premium?
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22. Risk Perception & Manipulation
Herd Behavior
Conclusions Research "Herd behavior and trading of Dutch pension funds"
by Rubbaniy et Al. (2011):
• Robust herding behavior in investments of Dutch pension funds
• Overall (LSV) herding level of 8.14% (significant at 1% level !!)
Possible explanations
1. Big Brother Hedge (imitation of
large pension funds)
2. Outsourcing: Strategy and Asset
management to the same large
and reputed asset management
firms
3. First Mover Risk
Source: Rubbaniy
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23. Risk Perception & Manipulation
Supervisory Compliant Risk
STRONG REGULATION HIGH “SUPERVISORY COMPLIANCE RISK”
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24. Risk Perception & Manipulation
Regulation, Part of Risk Management
DYNAMIC REGULATION REGULATION BECOMES PART OF RISK MANAGEMENT
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25. Risk Perception & Manipulation
Mean Variance Modeling in Time
Conclusion
Mean Variance
Models lose power
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26. Linear Thinking
We all think Linear…
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27. Linear Thinking
Examples…
Linear mechanisms in life
• On a short time scale things don't change much
• The best estimate for
‘tomorrow’ is ‘today’
• Results are a (linear) combination
of events in the past
• Every event now, must have a cause
Signs of (dangerous) linear thinking
• Mean Reversion
• Risk = Volatility = σ =Standard Deviation;
• Volatility (σ) is more or less constant in time…
• If a distribution is complex, a normal distribution
nevertheless will do fine
• Results of the past are an adequate estimator for the future
• Mean reversion: Returns continue to go back to an average value over time
• Increasing volatility is a good predictor of an upcoming financial crisis
• Tail risks are not really interesting or can't be modeled anyway
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28. Risk Perception & Manipulation
Risk = Standard Deviation Fallacy
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29. Risk Perception & Manipulation
Standard Deviation: a Poor Measure of Risk
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30. Linear Thinking
Linear Models, Why they are Limited
Observations
• Financial Crises show
increasing Covariance
between asset classes
• There’s a lack of diversifying
power in the asset mix
• Shortfall of explaining power
of linear based ALM Models
Linear Model Crisis
Traditional linear ALM models fail in the current market situation (Crisis)
• Artificial Interest Rates and Market (Value)
• There are no risk free assets: A Risk Free Interest Rate is an illusion
• No Witz: Markowitz’s Modern Portfolio Theory falls short
Mean reversion, Normality, Unstable asset class correlation, …. Harry Markowitz
• Asset Classes change in risk profile: E.G. Government Bonds
• Dynamic Regulation influences investment strategy and tactics
• Government Politics influence: QE-inflated unstable future stock markets
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31. Linear Thinking
Let’s be Fair…
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32. In Between Conclusion
Way out: explore new ways and change system
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33. Gold as Asset Class
All the Gold in the World…
All the above-ground gold in the world (start 2012):
• Weight: 165,000 metric tons (165 million KG)
• Volume: Fits in a 20m x 20m x 20m Cube
• Value: Roughly $9 trillion
• Yearly production: 2500 metric ton (2,5 million KG)
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34. Gold as Asset Class
Often mentioned disadvantages
• Gold has no (direct) return
• Gold price is volatile
• Vaulting Gold is expensive
• It’s only a small gold market
• The actual price of gold is already high
• Gold is a bubble
• Gold is risky and only a short term solution
• You can’t eat gold
• Gold is solidified fear sweat (Dutch: ‘gestold angstzweet’)
• Buying gold is investing in Armageddon
• Gold gets dug out of the ground, then we melt it down, dig another hole,
bury it again and pay people to stand around guarding.
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35. Gold as Asset Class
Gold Price & US Debt…
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36. Gold as Asset Class
Long Term Inflation Hedge
• Gold is no short, but certainly a long inflation hedge
• Nominal gold price (yellow)
• CPI 1 (red line) is calibrated for gold price at the beginning of the period.
• CPI 2 (green line) is calibrated for gold price at present.
Bron: The Gold Report (2009) & WGC: Gold as an asset class (2011)
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37. Gold as Asset Class
Real Interest Hedge
Negative real interest rate = price of gold increases
Positive real interest rate = flat gold price
Source: USfunds (2011)
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38. Gold as Asset Class
FED’s Gold Backing: The End of FIAT Money?
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39. Gold as Asset Class
Gold as a strategic asset (Price, Inflation, CI)
• Chart 1
Gold price increases substantially in
crisis scenarios
• Chart 2
Gold as an Euro inflation hedge
• Chart 3
Performance of gold relative to the DJ-
UBS Commodity Index
Source: WGC (Dec 2011): Gold as a strategic asset for European investors
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40. Gold as Asset Class
Gold as a strategic asset, Low Correlation
• The main reason why gold adds significant diversifying power is its low or
negative correlation with most other assets in an optimized portfolio context.
• We use Conservative return premium assumptions consistent with available
long-term data and the presumed role of gold as an inflation-hedge. The more
conservative the assumptions the more likely any significant findings may be
reliable for long-term investing.
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41. Gold as Asset Class
Gold’s correlation with other Commodities
• Gold is an exceptional commodity and behaves not like other commodities
• Gold is the only monetary metal. Silver follows at a distance
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42. Gold as Asset Class
Gold as diversifier: WGC Research
• Objective: Examine the case for gold as a diversifying asset in the context of a
common currency European institutional strategic asset allocation.
• Source: Empirical data from January 1986 through 2010 and more recent data.
• Assumptions: Conservative return premium assumptions that include :
assuming that gold and commodities had zero real returns.
• Method: Michaud optimization, an extension of Markowitz MV optimization
• Results
– gold has a strategic diversifying role roughly comparable to risky assets such as
small cap and emerging markets over the long-term.
– A relatively small allocation to gold appears to add useful and likely significant
diversification benefits for low to moderate strategic risk levels.
– An allocation of 1%-3% at low to moderate-risk levels may be appropriate for
many strategic institutional euro area portfolios.
– For high-risk portfolios some limited evidence for gold is available from our
results.
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43. Gold as Asset Class
Gold’s Diversification Power I
• Gold has a very limited correlation with other asset classes.
• Small gold allocations in the asset mix already improve the Risk-Return of a
portfolio?
Source: BlackRock, as of 5/31/10.
• “No Gold” portfolio has the following
allocation: 35% US Large Cap, 5% US Small
Cap, 20% International Equities and 40% US
Fixed Income.
• For the 5% gold, 10% gold and 20% gold
portfolios, gold was given those weights
respectively and the remaining portfolio
allocations were rescaled.
• Portfolios were assumed to have been
rebalanced monthly.
• US Large Cap: Russell 1000 Index; US Small
Cap: Russell 2000 Index; International
Equities: MSCI All Country World Index ex
US; US Fixed Income: Barclays Capital US
Aggregate Bond Index; Gold: COMEX Gold
Spot Price.
Source: The Special Case for Gold (2010)
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44. Gold as Asset Class
Gold’s Diversification Power II
The diversification power of physical gold, the low downside volatility and
excellent long term returns, are making gold an interesting De-Risk and Re-
Valuation tool in the ALM approach
Source: Striking Portfolio Balance with Gold Stocks
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45. Gold as Asset Class
Risk Return and Downside Volatility
• Gold: The Best downside volatility and excellent Risk Return Ratio
• Gold has a high long-term volatility, however, gold has the best downside volatility
(Sortino Ratio)
• Gold has an excellent Risk Return Ratio (Sharpe Ratio) Bron: Precious Metals (2011)
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46. Gold as Asset Class
Other Financial Properties of Gold I
• Gold as Collateral
Declining confidence in the financial markets
reduces the amount of triple-A securities, used
as an investment and as collateral.
Institutional investors, like pension funds, are
forced to look for safe investments and cash
collateral of high quality.
Large clearinghouses mark Gold as AAA collateral.
Source: WGC:Gold as a source of collateral (May, 2011)
• Gold as liquidity
Gold is the most liquid financial product during crises to cover derivative
positions, and is 24h a day traded (Comex New York, LBMA in London,
Switzerland, 24 hours electronically through Globex, PAGE in Hong Kong )
• Physical gold is portable
Physical gold is tangible, portable and transportable and a recognized as
international monetary exchange.
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47. Gold as Asset Class
Other Financial Properties of Gold II
• Gold as a store of value
– Gold as a store of value, in
comparison to the value stored in
government bonds from 1980,
shows great potential.
– Value of gold is easy to establish
good and gold is physically
divisible.
– Since 1911 governments didn’t
held as little gold held as they do
now.
• Gold has no counterparty risk?
– Gold is an insurance against
unexpected shocks in every asset
class, because it is the only
financial product that has no
counterparty risk
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48. Gold as Asset Class
Other Financial Properties of Gold III
• Gold as Currency Protector
– By default or devaluation of currencies, Gold
offers adequate value protection
– In contrast to currency or other types of
investment, the value of Gold never falls to
zero
– Gold is a currency that is not supported by
debt as opposed to other fiat or "paper
money" currencies.
– Gold is Basel III Tier 1 candidate, alongside
'sovereign bonds, cash or central bank
reserves.
“ Gold still represents the ultimate form of payment in the world.
Fiat money, in extremis, is accepted by nobody. Gold is ALWAYS
accepted.”
Alan Greenspan, Chairman Federal Reserve, US Congress 1999
Source: Superfund Gold
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49. Gold as Asset Class
Gold as Tail Risk Protector , VaR Reduction
• Gold, in both good and bad times, is
essential (for institutional investors) in
stabilizing the return of an existing
asset-mix
• By adding gold for a limited part(3-9%)
in the existing optimal asset mix , the
Value at Risk can be "substantially
reduced”
• This property of gold in the portfolio is
important for example for a possible
devaluation of a real estate portfolio
(mark-to-market), haircuts on the bond
portfolio and plummeting stock
markets.
Source: WGC: Gold as an asset class (2011) & WCC:Gold: Hedging against tail risk (2010, oktober)
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50. Gold as Asset Class
Gold as Tail Risk Protector , Crisis Resistance I
• A limited asset allocation of 5.5% in euro gold offers investors a
substantial outperformance and protection in times of crisis
Source: WGC: WGC: Gold: alternative investment, foundation asset
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51. Gold as Asset Class
Gold as Tail Risk Protector , Crisis Resistance II
• Especially in uncertain times, gold can increase in value.
• In crises of various kinds, the stock market often takes losses at once, while at the
same time the development of the gold price is often positive.
• As an example, the monthly losses of shares (MSCI World Index) and the
development of the price of gold in the same month at various times of crisis.
“In the absence of the gold
standard, there is no way to
protect savings from confiscation
through inflation. There is no safe
store of value. Deficit spending is
simply a scheme for the
confiscation of wealth.
Gold stands in the way of this
insidious process. It stands as a
protector of property rights.”
Alan Greenspan 2011
Source: Superfund Gold
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52. Gold as Asset Class
Vision: Prof. Dr. Ruud Kleynen, April 2011
4. Gold: what to say about that
1. It looks like gold performed best over the
analyzed period
2. Only gold finally was able to meet required
return levels based on indexing ambitions
3. Traditional stock markets did not do such a
good job
4. Gold could be seen as a safe haven in periods
of economic distress
5. Long term expectations for gold look
interesting
6. Should the traditional construction of
portfolios be reconsidered?
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53. Gold as Asset Class
Vision: Ir Dennis van Ek AAG, CFA , May 2012
Summary Article ‘Investing in Gold’ (Kluwer)
1. Gold is an asset class, no sub-asset class or subset of commodities
2. Gold offers purchasing power protection
(scarcity, value quality, worldwide)
3. Gold is the basis of our monetary system
4. Central banks keep gold, no commodities
5. Optimal gold allocation in a portfolio: 5-10%
6. In times of crisis: allocation >10%
7. Long term ‘better 'performance with gold
in a portfolio: + 0.15% (equal risk)
DNB Annual Report 2010
In times of financial crisis, DNB’s physical stock
of gold serves as an ultimate reserve asset and
as an anchor of trust.
Gold is also held for diversification reasons.
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54. Gold as Asset Class
Vision: GSCG, April 2011
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55. Gold as Asset Class
Status Quo Asset Mix I
Current asset mix Dutch pension Funds
• After the WW-II it was still forbidden by law to
invest in equities
• Since 1980 pension funds have increasingly
invested in ,
• As from 2000, derivatives are increasingly
deployed (Risk Mitigation)
• Today, the asset mix mainly consists of: Bonds,
Equity, Real Estate, Commodities and derivatives.
• Commodities (2011: 0.3%) are usually allocated in
ETFs, Futures and Options, as physical allocation
entails higher costs.
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56. Gold as Asset Class
Status Quo Asset Mix II
Gold in the asset mix
• Gold is usually seen as a commodity
• Dutch pension funds invest only very limited in gold-related financial
instruments (including shares) and almost not in physical gold.
• Globally (pension assets $ 31.1 trillion) pension funds average invested 0.15%
in gold and another 0.15% in gold-related products
• The pension funds that invest in gold do so mainly as a hedge against inflation.
Inflation may also (partly) be covered with Inflation Linked Bonds (ILBs)
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57. Change to Gold
The Main Issue
FOCUS
Pension Journal for the ground crew of KLM, December 10, 2011
‘Is it an idea to invest in gold?’
‘The investment committee
could suggest that, but in
practice this has not
happened yet.’
Nico van Wieringen, Controller Participations at KLM, in conversation with
the Chairman of the Participants Council: Frans Reder.
Source:Focus
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58. Change to Gold
The Challenge
Gold Ignorance
Due to conventional regulations, a profound lack of awareness, support and
knowledge, only a limited number (2) of Dutch pension funds invest in
physical gold
Research shows financial institutions mainly consider gold as an ordinary
‘zero return commodity’, are unaware of the unique (financial) properties of
gold, however are interested in discussing physical gold investments, but
mainly fear first mover risk
Pension fund advisors and asset managers have no or only a limited and
passive interest in advising or managing physical gold
There’s a lack of qualified information about gold.
Gold is not an active subject in the education
of investment professionals (e.g. VBA)
Gold Challenge
Balanced investment in physical gold reinforces diversification and long
term ‘inflation protected return’ without counterparty risk and therefore
contributes to the sustainability of financial institutions Source:Focus
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59. Change to Gold
Psychological Arguments against Gold I
• Lack of Strategy Vision
How will the Regulator react when we invest in gold
• Big Brother Hedge
If other pension funds don’t invest in gold, why should we?
• First Mover Risk
Gold is interesting, but we don’t have enough experience
• Strongly Delegated Investment Strategy
Our investing consultant and/or asset manager doesn’t advice gold
• Conservative/Narrow Investment Control & Judgment Procedures
We can’t see gold as a sustainable asset class. If gold wouldn’t perform
well according target for a longer (>1Y) period, we would exit on gold.
Gold as an asset mix 'stabilizer’
More important than the individual properties of gold, is
the overall effect of gold when it is added in the right
limited proportion in the meal of the asset mix.
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60. Change to Gold
Psychological Arguments against Gold II
• Knowledge Aspects
– Is this the right timing? Gold is sky high
– Gold has no return
– What’s the long term return on Gold?
– Gold is simply a Commodity, nothing special
– I see gold as an Insurance, tactical (arbitrage) play,
but ‘Asset Class’?
• Excuses
– Our pension fund is very busy….
– We just did our ALM study, we’ll look at gold the
next time (2015)
– Our ALM study is already so complicated……..
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61. Change to Gold
Outcome Field Research 2011-2012 (I)
• Pension Funds, administrators and Actuarial Consultants are open
to discussions & information on Gold as asset class
• Pension funds are interested but too busy (pension cuts,
new pension agreement, mergers, recovery plans, etc.) to act on
gold right now
• Pension Funds (generally) will not act on gold without a positive advice of their
Investment consultant and Asset manager
• Pension funds dare not to act, because of Peer Risk and ‘Major Pension Fund-
hedging’ (first mover risk and keeping score ahead of the top-3 Dutch pension
funds)
• Regulators (DNB, AFM) are very cautious and point at the risks involved with an
investment in gold. Any investments in gold need to be well and upfront
underpinned.
• Gold as collateral, Tier 1 and Clearing asset seems to become
very important. In the fuzz of daily business only a limited
number of pension funds seem to be aware of this
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62. Change to Gold
Outcome Field Research 2011-2012 (II)
• Asset Managers often don’t view gold as an asset class and will not advice it
without an explicit request
• Asset Managers are quite often unfamiliar with physical gold
and advice alternatives (commodities, ETFs, Shares, etc.)
• Pension funds are limited in allocating gold in case of a
100% mandate (without any own room to maneuver)
with their fiduciary manager.
• Gold is not part of the ALM or stress scenario’s
• Investment consultants don’t actively advice or recommend gold and are
extremely reticent with gold
• Main Investment Consultants often operate on basis of linear ALM software,
supplemented with some special extreme scenarios.
• Investment Consultants instead of pension boards or pension board advice
committees, lead the discussion on the scenarios that will apply in ALM studies.
• The Pension Board’s Risk view is developed while running and discussing the
outcome of the ALM scenarios, rather than an upfront vision of the board or
including (nonlinear) economic scenario discussions.
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63. Change to Gold
Consultancy Dependency, Example
Classic Investment Consulting Approach Dialog
PB: Can you advise us on our ALM?
IC: Sure.., tell me your “Strategic Goal“ & “Risk Appetite”?
PB: Hmm…, Can you help us on that too?
IC: Of course, that’s what we are for! We’ll be back in a week
IC: Here we’re back with more than 15,000 economic scenarios!
PB: Impressing! What’s in it for Return and Volatility?
IC: It’s all in there, a mix of historical returns, asset mixes, horizons,
crises, whatever you can think of…. All designed by our experts!
PB: Wow!! Looks great… But what’s that blue line over there?
IC: That’s one of the more unlucky crisis scenarios …
PB: We don’t like that one, It’s outside our Risk Appetite……
IC: O.K., we’ll “hedge that scenario away”…..
Further we can minimize downside risks with derivatives….
PB: And what’s the strategic asset mix?
IC: It’s all dynamic and risk based, you don’t have to care about
your mix, our strategic scenario-generator takes care of that.
It operates like an autopilot on your Strategic Asset Mix.
PB: O.K. Thanks a lot. How to set up an investment mandate on this? Conclusions……
IC: Don’t worry, we’ll define a dynamic investment mandate for your • Pension board Training
asset manager. • Economic Skills
PB: And what about reporting? • Define your own Strategy
IC: No problem, we’ll take part in your Investment Advisory
and Risk Appetite
Committee (IAC) and pre-comment on every AM-report.
PB: We all agree on all your proposals. Thanks for helping us OUT!!
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64. Change to Gold
The canary in the Gold Mine
Japanese pension fund switches to gold May 16, 2012
By Ben McLannahan in Tokyo
Okayama Metal & Machinery has
become the first Japanese pension fund
to make public purchases of gold, in a
sign of dwindling faith in paper
currencies.
Initially, the fund aims to keep about 1.5
% of its total assets of Y40bn ($500m) in
bullion-backed exchange traded funds,
according to chief investment officer
Yoshisuke Kiguchi, who said he was
diversifying into gold to “escape
sovereign risk”.
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65. New Solutions
Headlines of a Nonlinear ALM approach
• Using insights of nonlinear dynamic economics
• ALM no longer based on sole ‘Mean reversion’
• Expectations of economic variables, linked to
evolutionary dynamics. Thus, limited rational
investors and properties of herd behavior and
excessive optimism or pessimism can be modeled
• Modeling of monetary policy of a central Bank
• Extreme uncertainty in the valuation of liabilities by the regulator can be modeled
• The impact of change in future laws and regulations as EMIR, Basel III and Dodd-
Frank on the need for liquidity in investment portfolios, and Solvency II on the
minimum funding requirements, can be modeled
• Time-varying risk premiums on asset categories and covariance between asset
classes are integrated
• Specific ‘once in a lifetime’ economic events can be modeled
• Specific relationships between asset classes and economic development can be
simulated and analyzed
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66. New Solutions
Examples of other New Semi Nonlinear Models
Discussion
Should we, actuaries, become more active on the asset side of the
balance sheet
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67. New Solutions
Think Backward
Discussion
To get out of this crisis we
need actuaries who are able
to think different.
Actuaries that can not only
analyze ‘numbers’ , but are
able to explain how risks and
goals can be achieved.
The ability to think backward
is essential in this process.
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68. Conclusion
Final Conclusions
• Limited addition of gold as an asset class in the asset mix:
• increases the strength of a diversified portfolio
• reduces the downside risk of a portfolio
• improves long-term returns of a portfolio
• As part of the asset mix Gold offers adequate protection against:
• Economic, Crisis and VaR risk
• Value fall of other asset classes and international currency
• Long-term inflation and negative real interest rates
• Gold has a number of important characteristics :
• Excellent Collateral (AAA); No counterparty risk
• Liquid Transparent pricing; International currency
• Best downward volatility protection of all asset classes
• Gold should be included in the asset mix.
• Gold is relevant for creating a sustainable pension investment return.
To get there we need to spread knowledge and develop new insights.
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69. Contact, Information
GSCG
Jos Berkemeijer : Start-Up Director at GSCG Market Intelligence
T: +31 646 12 06 60
E: jos.berkemeijer@gmail.com
Martijn van Eck: Program Manager a.i. at GSCG Market Intelligence
T: +31 652 56 87 75
E: vaneck@gscg.nl
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70. Reader
Links to Documents
Main Documents
1. Presentatie prof. Dr. Ruud Kleynen (april 2011) congres Visie op Goud
2. WGC:Gold as a strategic asset for European investors (2011, December)
3. The Special Case for Gold (2010)
4. Precious Metals (2011, November)
Specific documents
1. WCC: Gold: Hedging against tail risk (2010, October)
2. WGC: Gold as a source of collateral (2011, May)
3. WGC: Gold as a Strategic Asset (2006)
4. Safehaven: Going Back to a Gold Standard? (2010)
5. WGC: Gold: alternative investment, foundation asset (2011)
6. WGC: Gold as an asset class (2011, January)
7. WGC: Liquidity in the global gold market (2010)
Internet publications
1. Striking Portfolio Balance with Gold Stocks (2011, December)
2. Adding Gold To An Equity Portfolio (2011, October)
3. The role of gold in your investment portfolio (2009)
4. Gold, Silver and Pension Funds Portfolio Diversification Myths (2011, July)
5. USfunds (2011)
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71. Reader
Titles Relevant Books
Studies role of gold in a portfolio
• Thomas M. Idzorek, ‘Portfolio Diversification with Gold, Silver and Platinum’
• Further, Hillier et al, ‘Do Precious Metals Shine: An Investment Perspective’
• Jedrzej P. Bialkowski, Martin T. Bohly, Patrick M. Stephan and Tomasz P.
Wisniewski, ‘Is There a Speculative Bubble in the Price of Gold?’
• Dirk G. Baur and Brian M. Lucey, ‘Is Gold a Hedge or a Safe Haven? An Analysis of
Stocks, Bonds and Gold’
• Dirk G. Baur and Thomas K. McDermott, ‘Is Gold a Safe Haven? International
Evidence’
• James Ross McCown and John R. Zimmerman, ‘Is Gold a Zero-Beta Asset? Analysis
of the Investment Potential of Precious Metals’
• Massimiliano Marzo and Paolo Zagaglia, ‘Gold and the U.S. Dollar: Tales from the
Turmoil’
• World Gold Council, ‘Gold as a Source of Collateral’
• World Gold Council, "Gold: Hedging against tail risk"
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